Big fixes done, HBC owner plans IPO

Toronto  The U.S. owner of Hudson's Bay Co. says he inherited a “get-your-hands-dirty” job fixing a retailer that carried too many brands, failed to adjust space to changing consumer tastes and pumped money into projects not core to the business.

Now that he is making progress in a makeover of Canada's oldest company, Richard Baker said he wants to give a little piece of Canada back to Canadians and is looking at taking the iconic retailer public again in early 2011.

Mr. Baker's comments Wednesday at an industry conference were his most emphatic to date about the troubles at the company that owns the Bay and Zellers chains, which he acquired in July, 2008, after the death of its former owner, U.S. businessman Jerry Zucker.

“This was not a real estate play,” said Mr. Baker, a U.S. real estate magnate who acknowledged his early interest in the value of HBC's property. “This was not a financial manoeuvre. This was a get-your-hands-dirty cleanup of an operating company that had not made hard decisions in hundreds of years. It's mind-boggling to think of the opportunities.”

When he arrived, Mr. Baker said the retailer had no real “merchants” at its head office – people with a deep understanding of products and how they should be displayed. Rather, the senior ranks were filled with financial and operational experts.

He said he also found an array of unnecessary expenses – everything from running sales whose costs were greater than their benefits, to tossing damaged goods rather than returning them to suppliers and collecting money for them.

“It cost us more money to have a sale than it was not to have a sale,” he said. “No one had ever gone back and done the hard work to figure out why they did things.”

To try to improve margins, the Bay will shift its “Bay Days” markdowns to October from the end of September, to try to ring up more sales at the original prices, he said.

Nobody had bothered to reallocate space to fast-growing departments such as contemporary women's wear, handbags and shoes. Rather, the merchandise was stuffed into inadequate space while underperforming areas, such as home goods, remained unchanged.

“The men and women of Hudson's Bay Co. are spectacularly loyal, hard-working, great individuals,” he said. “It just somehow was moving in the wrong direction.”

Mr. Baker has been quick to make changes. Today, HBC is on its way to doubling its profit by the end of 2009 – mainly from $300-million of cost cuts – after years of struggling. He trimmed another $100-million of expenses at Lord & Taylor, the upscale U.S. department store chain he also owns.

He hired veteran merchants to head up HBC and its two key divisions. His team cut about 1,000 HBC employees early this year and put a stop to 70 of 75 internal projects that were not part of the retailer's core business. They included such initiatives as selling merchandise directly to other firms.

The Bay dropped 700 underperforming brands among its 1,200 labels in all, and instead added 150 new ones, such as Juicy Couture, Theory and Hugo Boss. It is scaling back inventory in the stores by 20 per cent, and making more room for growing departments, while reducing space for home items and men's and children's wear.

Reallocation of space will boost sales more than 50 per cent in some departments, he predicted. Zellers is focusing more on such key areas as pharmacy, baby, and children's products. At the discounter, every additional $10 of sales a square foot generates $100-million of added EBITDA (earnings before interest, taxes, depreciation and amortization), he said.

“We're really optimistic about where it's all going,” Mr. Baker said.

He's so bullish that he'd like to do an initial public offering on the Toronto Stock Exchange in the first half of 2011. He is even considering including Lord & Taylor in the IPO.

He said in an interview after the conference that he's not working with an investment bank or underwriter, and that he will remain active in the business and hold on to his shares. He did not say whether he would spin off a majority or minority of the company.

“Nothing is formal,” he told reporters. “We are beginning discussions. We do think it would be exciting to, as we think about it, give the Hudson's Bay Co. back to the Canadian people.”

Industry sources have estimated that Mr. Baker is looking for $80-million to pay down preferred shares that carry high interest rates. They estimate that, based on other retail IPOs, he would try to raise between $100-million and $200-million in an IPO.

HBC's real estate alone is worth an estimated $1.2-billion – a little more than the equivalent purchase price of the retailer itself.

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